WATCH: Kelly Discusses Order to Freeze Federal Funding and Effects on Defense Innovation, Military Readiness

This week, during a Senate Armed Services Committee hearing on defense innovation and acquisition reform, Arizona Senator Mark Kelly highlighted the serious consequences of a White House order freezing federal funding and grants for Department of Defense (DoD) research and manufacturing technology, emphasizing the harm this could cause to military readiness and America’s ability to maintain a competitive edge over adversaries. 

This week, the Office of Management and Budget (OMB) issued the order, halting all federal financial assistance, including loans and grants, to programs nationwide—impacting DoD research, small business innovation, infrastructure projects, education funding, and support services for veterans and military families. While a federal judge has temporarily blocked the freeze, its potential impact remains significant. If enforced, it could disrupt critical defense research and production, delaying the delivery of advanced technology essential to military readiness. 

During the hearing, Kelly spoke with former Assistant Secretary of the Navy James Geurts, Palantir Technologies’ Shyam Sankar, and Divergent Industries’ Nathan Diller about the real-world consequences of a funding freeze on defense innovation. They acknowledged that inconsistent funding erodes trust, hinders long-term innovation, and places financial strain on companies fulfilling DoD contracts. Diller further warned that these disruptions could discourage new entrants from working with the DoD, limiting competition, and slowing technological advancement.

As a Navy veteran and co-chair of the Defense Modernization Caucus, Kelly remains focused on strengthening national security by accelerating the integration of emerging technologies and ensuring the U.S. military has the advanced tools needed to counter rising threats—an effort now jeopardized by the president’s reckless decision to freeze critical funding. 

“We’ve got to ensure that our military is not only equipped with cutting-edge technology but also has the infrastructure to remain effective in contested environments where supply chains and sustainment could be disruptive,” said Kelly. “I suggest when you get back to your companies that you take a close look and see what the impact is going to be to you and your employees, and our readiness.” 

Click here to download a video of Kelly’s remarks. See the transcript below: 

Sen. Kelly: Thank you, Mr. Chairman. Thank you, all of you, for being here today.  

As the ranking member of the Airlines Subcommittee and the co-chair of the Defense Modernization Caucus, along with Senator Cramer, I’m focused on maintaining our competitive edge over adversaries. To achieve this, we’ve got to ensure that our military is not only equipped with cutting-edge technology but also has the infrastructure to remain effective in contested environments where supply chains and sustainment could be disruptive.  

I don’t know if the three of you saw an order from OMB, from the White House, last night or yesterday. An expansive order with repercussions across the country. It’s unprecedented, and this order, I’ll explain here in a second, where I think the defense impact could be, this is cutting, pausing Medicaid health plans, Pell grants, meals for kids, nutrition programs for pregnant mothers, programs to help homeless veterans.  

And it appears that it also may freeze federal funding and grants for Department of Defense research and manufacturing technology and other small business innovation programs.  

So, I want to ask each of you, starting with Mister Geurts, have you looked at this memo that was issued last night? And are you concerned that a blanket freezing of these funds would impact our readiness and ability to compete with China and other adversaries? I want to start with Mr. Geurts. 

Mr. Geurts: Sir, I’ve not seen the exact memo you reference, but more globally, one of the challenges with the DoD as a customer is there’s lack of trust that they’ll be there and they will start, stop, start, stop, and I think that could send a bad signal to business, and then also if we stop a bunch of research and are not staying on the technical edge, that could be detrimental to the force. 

Sen. Kelly: And Mr. Sankar, for Palantir specifically, let’s just say in a couple days you find out that that contract payment that you were about to receive, you’re not going to receive it and you’re not going to receive it next month or the month after that.  

Could you talk specifically about how would impact your company? 

Mr. Sankar: I think you can imagine that it causes quite a bit of heartburn, particularly for services already rendered. But it’s a difficult environment. 

Sen. Kelly: And where are your employees?  

Mr. Sankar: All over.  

Sen. Kelly: All over. How many? 

Mr. Sankar: Four thousand total.  

Sen. Kelly: If you didn’t get paid by the federal government for the next three months, how many of them do you think you’d have to lay off? 

Mr. Sankar: I would rather not think about it. 

Sen. Kelly: You’d rather not think about it. OK, Mr. Diller, for Divergent, what would be the impacts if your federal dollars contract payments were to stop? 

Mr. Diller: As a dual-use company that really is just starting into the defense space certainly it would deter us from continuing that, I think, you know, we’ve seen this over the years and this is one of the many things that creates risk for companies and in some instances, when I was a director of AFWERX, we simply could not convince some commercial companies to go do business with the Department of Defense, and so obviously trust is key on these things and understanding continuity of agreements made is important. 

Sen. Kelly: You’re going to find out in the next probably twenty-four hours if it’s going to impact you and your company and your employees and people who live in those communities.  

But this is an unprecedented overreach from the White House. To, with a directive from OMB, freeze programs that folks on this committee in the United States Senate authorized money to be appropriated for very specific programs. Programs that help homeless vets, nutrition programs for moms, but also programs that affect our safety, our readiness, our troops, to make sure that they have the combat power that they need to win, win in a very tough environment. 

I’m very concerned about this action that the White House took without—I guess they notified us; they say it goes into effect at 5:00 p.m. I suggest when you get back to your companies that you take a close look and see what the impact is going to be to you, and your employees, and our readiness.   Thank you, Mr. Chairman.